Late Payroll Taxes
The Most Expensive Business Loan You Ever Got!
How To Navigate Back Payroll Taxes?
(For Business Owners)
The Internal Revenue Code mandates that employers collect employment taxes directly out of wage earner’s income and send it directly to the IRS. The term “payroll taxes” includes: withheld wages as well as FICA (Social Security and Medicare). The total amount to be withheld depends on the worker’s filing status and the number of exemption claimed by the employee. The business must match and deposit the FICA portion along with the withholdings to the IRS via electronic fund transfers. Payroll taxes are reported on Forms 940 and 941. The frequency of the tax deposits mainly depends on the amount of the payroll. A payroll service or another type of employee leasing agency may be used to assist with the administration of wages and withholdings. However the employer retains the ultimate responsibility for payment of employment taxes.
Payroll taxes and withholdings are the foundation of the Income Tax and Social Security Systems. This system works well when the business and the workers follow the legal requirements. Unfortunately, sometimes the payroll tax withholding process breaks down on a case by case level. In certain circumstances, the business fails to collect or remit part or all of the withheld taxes and FICA to the IRS.
How Does A Business Fall Behind On Payroll Taxes?
Failure to comply with employment tax obligations is an extremely serious offense. The IRS relentlessly assesses penalties and interest on top of the unpaid tax, adding additional financial stress on an already weak financial condition of the employer. Although few business owner intentionally abuse the payroll tax system, the majority of the delinquent employers fall behind due to cash flow problems. Most business owners who never intended to fall behind are horrified at the prospects of being delinquent. Sadly, as the employer encounters economic downturn, or a cash flow issue, withheld taxes might be used to pay other business or even personal expenses. If a turnaround or a cash infusion does not happen quickly, the delinquency will compound and may last for years. The non-compliance might not be limited to non payment of taxes. Often the business fails to file the required Forms 940 and 941 altogether.
What Happens When A Business Falls Behind On Payroll Taxes?
Once the IRS discovers the failure to file or pay employment taxes, they will begin the process of assessing and collecting the back taxes. The IRS may send a number of letters asking, urging and later threatening the taxpayer to come into compliance. Eventually a collector will pay a visit collect the taxes. It may take years for the IRS to discover the delinquency. Although, the taxpayer has time to turn the business around, the subsequent penalties and interest greatly inflate the debt. Once the taxpayer is forced to file, the resulting tax bill might have doubled from the original tax owed on the tax returns. The taxpayer is seen as holding the funds in “trust” for the government. Failure to timely turn over the funds is treated more harshly than other tax delinquencies. Some tax collectors take a very accusatory posture in their attempt to collect this type of debt.
Once the delinquent employer is identified, the IRS will launch an extensive investigation to determine the level on non-compliance, and ascertain the amount of the debt. An IRS Revenue Officer may arrive at the business or the owner’s residence to discuss the account. If the returns are not filed, the IRS may file inflated tax returns on the taxpayer’s behalf through their SFR filing program. If the communication and the cooperation between the government and the business owner break down, the IRS may unleash its powerful arsenal of liens and levies, putting the business under increase financial stress. Criminal prosecution, personal liability against business owners “trust fund recovery penalty”, and closure of the business are also possible. Harsh collection tactics are more likely if the taxpayer continues the delinquency in the current and subsequent tax periods.
TaxHelpers Can Manage Your Payroll Tax Problem
Although payroll tax problems are complex and difficult to resolve, they do not have to destroy your business. Having experienced representation is vital. Depending on your situation and your ability to cooperate with us, TaxHelpers can restructure your business, secure additional time to pay the balance or settle the tax debt for a much less. Our lawyers have extensive experience in resolving tax problems. Call us if you want to protect and save your business or deal with back taxes from an old business.
Congress enacted the Trust Fund Recovery Penalty Statute to encourage prompt payment of withheld and other collected payroll taxes by allowing the Internal Revenue Service to assert a liability against responsible third parties [IRC 6672]. The amount of the penalty imposed by the statute for failure to comply with its provisions is measured by the payroll taxes required to be collected or collected and not paid over. That is why the liability is referred to as a “100% Penalty.” The penalty is civil in nature, not criminal.
Congress clearly restricted the provisions of IRC 6672 to “Trust Fund” taxes as defined in IRC 7501. In other words, the penalty only applies to collected or withheld payroll taxes that are imposed on persons other than the party who collects payroll taxes, accounts for payroll taxes, and pays over such payroll taxes.
Requirements For Liability
There are two major tests to determine if someone is subject to the provisions of IRC 6672. They are primarily questions of fact and may be stated as follows: (1) Whether the party against whom the penalty is proposed had the duty to account for payroll taxes, collect payroll taxes, and turn over trust fund payroll taxes; and (2) Whether he or she willful failed to perform this duty relating to the trust fund payroll taxes.
In general, the IRS has the right to pursue any person who meets the tests, even if he was not an officer or employee of the corporation which originally collected the payroll tax problem.
The penalty can be assessed against more than one person. It is not unusual for the IRS to assess the penalty for payroll tax problem against several responsible persons. In the event that the IRS assesses several persons for trust fund payroll taxes, it may collect the entire liability from any of those persons.
Responsibility And Willfullness
When a corporation fails to pay payroll taxes, the IRS may proceed against the persons responsible for the nonpayment of such payroll taxes. IRC 6672 provides statutory authority for imposing a Trust Fund Recovery Penalty on “any person required to collect payroll taxes, truthfully account for payroll taxes, and pay over collected payroll taxes” who willfully fails to collect such payroll taxes or willfully attempts in any manner to evade or defeat such payroll taxes or payment thereof. Generally, two conditions must be met in order to assess and collect the Trust Fund Recovery Penalty tax: (1) The taxpayer must be a responsible person for such payroll taxes, and (2) The taxpayer’s conduct must be willful in relation to the mishandling of such payroll taxes
The key to liability for payroll taxes under Section 6672 is control of finances within the employer corporation: the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding payroll taxes obligations. Liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government. This duty is generally found in high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursal of funds.
The IRS must prove and establish a second element for liability under the Trust Fund Recover Penalty for payroll taxes. That element is “willfulness.” A responsible person need not have failed to pay the payroll taxes with a fraudulent or evil purpose. That person must merely be shown to have knowingly and intentionally disregarded the duty to pay trust fund payroll taxes to the IRS. “Willfulness” can be defined as “an act is willful if it is voluntary, conscious, and intentional. A responsible person acted willfully if he ‘knowingly’ used available funds to prefer other creditors to the IRS
Restructuring the Business to Fix Payroll Tax Problem
When a business falls behind on Payroll Taxes, there are several things every business owner must consider in the recovery plan:
- What caused the delinquency?
- What needs to be done immediately?
- What needs to be done going forward?
What Caused The Delinquency?
Here are the most common causes of employment tax delinquencies:
- Business slows down due to economy
- Tax withholdings are used for business expenses
- Withheld funds used for personal purposes
- Owner or Manager gets ill or has personal problems
- Major customers delay payments (or close)
- Business grows too fast-cash flow can’t keep up
- Employee embezzles funds
- Owner doesn’t know or understand payroll taxes
What needs to be done immediately?
The business owner will eventually decide, or be forced by the IRS to address the payroll tax situation. The initial and unavoidable first step towards addressing the problem is getting into current compliance. The business will immediately need to:
- Start depositing and matching the tax withholdings for the current quarter
- Establish controls to insure all future returns are filed and paid on time
- Consider hiring a payroll company (like ADP or Paychex)
- Determine if the business can remain profitable or break even
- Determine if the business can afford all current employees
- Consider using independent contractors instead of employees
- Determine if the Trust Fund Portion can be paid off
What needs to be done going forward?
If the business is to continue operating, future compliance with payroll tax obligations is an absolute requirement. It is likely that the IRS Revenue Officer will want to see copies of regular tax deposits and filings as they are due. Furthermore, the IRS will require perfect compliance with income taxes as well.
If the business owner has been able to restructure the operations for profitability and tax compliance, they will need to address the outstanding tax balance.
The key options available for resolution of an ongoing business are:
- Installment Agreement
- Offer in Compromise
- Hardship Status
Related Topic: Trust Fund Recovery